Donor’s Tax on a Lot with Ongoing Construction in the Philippines: How to Compute and Pay

Introduction

In the Philippines, the act of donating property, such as a lot with ongoing construction, triggers the imposition of donor's tax. This tax is levied on the donor for the privilege of gratuitously transferring property to another person or entity without consideration. Donor's tax is a key component of the country's estate and gift tax system, designed to prevent the circumvention of estate taxes through lifetime transfers. Under the current tax regime, as amended by Republic Act No. 10963 (the Tax Reform for Acceleration and Inclusion or TRAIN Law) and further refined by subsequent regulations, donor's tax applies uniformly to all donations, regardless of the relationship between the donor and donee.

This article provides a comprehensive overview of donor's tax as it pertains specifically to the donation of a lot with ongoing construction. It covers the legal framework, valuation methods, computation process, filing and payment procedures, and ancillary considerations. Note that while this discussion is based on prevailing Philippine tax laws, taxpayers are advised to consult with a qualified tax professional or the Bureau of Internal Revenue (BIR) for case-specific advice, as interpretations and regulations may evolve.

Legal Basis

Donor's tax is governed primarily by Section 98 to Section 104 of the National Internal Revenue Code (NIRC) of 1997, as amended by the TRAIN Law (effective January 1, 2018) and Republic Act No. 11534 (Corporate Recovery and Tax Incentives for Enterprises or CREATE Act). Key implementing regulations include Revenue Regulations (RR) No. 12-2018, which details the revised donor's tax rules post-TRAIN, and various BIR issuances on property valuation.

Prior to the TRAIN Law, donor's tax rates were graduated (ranging from 2% to 15% for relatives and 30% for strangers). The TRAIN Law simplified this to a flat 6% rate on the net value of gifts exceeding P250,000 in a calendar year, applicable to both relatives and non-relatives. This reform aimed to encourage lifetime transfers while ensuring revenue collection.

For real property donations, additional civil law principles apply under the Civil Code of the Philippines (Republic Act No. 386), which classifies land and attached constructions as immovable property. A lot with ongoing construction is treated as a single immovable asset, as buildings or improvements become part of the land by incorporation (Article 415, Civil Code).

What Constitutes a Donation Subject to Tax

A donation is defined under Article 725 of the Civil Code as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. For tax purposes, the BIR considers a transfer as a donation if it is made without valuable consideration and not in the ordinary course of business.

In the context of a lot with ongoing construction:

The donation includes the land title and any improvements, such as partially built structures (e.g., foundations, walls, or framing).
If the construction is ongoing, the donor must specify in the Deed of Donation whether the transfer includes the right to complete the construction or if it's "as-is."
Donations can be inter vivos (during the donor's lifetime) or mortis causa (effective upon death, which may be treated as part of the estate for estate tax purposes if revocable).
Exemptions: Certain donations are exempt from donor's tax, such as those to the government, accredited non-profit organizations for educational, charitable, or religious purposes (up to the full value if qualified), or gifts not exceeding P250,000 per calendar year. However, for real property like a lot with construction, exemptions are rare unless the donee qualifies under Section 101 of the NIRC.

If the transfer involves any form of consideration (e.g., assumption of a mortgage or payment), it may be reclassified as a sale, subject to capital gains tax (6% on gross selling price or FMV, whichever is higher) and documentary stamp tax (1.5% on FMV).

Valuation of the Property

Accurate valuation is critical for computing donor's tax, as the tax base is the fair market value (FMV) of the donated property at the time of donation. For a lot with ongoing construction, the valuation must account for both the land and the incomplete improvements.

Determining Fair Market Value

Land Value: The FMV of the land is the higher of:
- The zonal value established by the BIR Commissioner (published in Revenue District Office schedules and updated periodically).
- The assessed value as per the schedule of market values from the Provincial, City, or Municipal Assessor (under the Local Government Code).
Ongoing Construction Value: Improvements are valued based on their current state. This includes:
- Actual costs incurred (e.g., materials, labor, permits) up to the donation date, supported by receipts and contracts.
- Appraised value by a licensed appraiser, considering depreciation, completion percentage, and market conditions.
- If the construction is significant (e.g., over 50% complete), it may be appraised as a percentage of the projected completed value.
Total FMV: Sum of land FMV and construction value. If the property is encumbered (e.g., by a mortgage), deduct the encumbrance assumed by the donee from the gross value to arrive at the net gift.

The BIR may challenge the declared value and impose its own assessment if it deems the valuation understated. Taxpayers can request a BIR appraisal or use third-party valuations, but these must align with BIR guidelines (e.g., RR No. 2-2014 on zonal values).

Special considerations for ongoing construction:

If the donor continues funding construction post-donation, those additional costs may be treated as separate donations, subject to additional tax.
Environmental or zoning issues affecting the construction could impact FMV (e.g., if permits are pending).
Inflation or market fluctuations between construction start and donation date must be factored in.

Computation of Donor's Tax

The donor's tax is computed on a calendar-year basis, aggregating all gifts made by the donor during the year.

Step-by-Step Computation

Determine Gross Gifts: Sum the FMV of all properties donated in the calendar year, including the lot with construction.
Apply Deductions and Exemptions:
- Subtract the P250,000 annual exemption (applied to the total net gifts).
- Deduct any encumbrances assumed by the donee.
- Special deductions for certain donees (e.g., full deduction for government donations).
Compute Net Taxable Gifts: Gross gifts minus exemptions/deductions.
Apply Tax Rate: 6% on the net taxable gifts.
Add Penalties/Interest if Applicable: If filed late, add 25% surcharge, 12% interest per annum, and possible compromise penalties.

Example

Suppose a donor gifts a lot valued at P5,000,000 (zonal value) with ongoing construction costing P2,000,000 (actual costs incurred, 40% complete).

Gross Gift: P7,000,000.
No other gifts in the year; no encumbrances.
Net Taxable Gift: P7,000,000 - P250,000 = P6,750,000.
Donor's Tax: 6% of P6,750,000 = P405,000.

If the donor made prior gifts of P100,000 in the same year, aggregate to P7,100,000, then subtract P250,000 for net of P6,850,000, taxed at 6% (P411,000).

For multiple donees, tax is computed per donee but aggregated for the donor's annual return.

Filing and Payment Procedures

Requirements

Deed of Donation: Must be in writing, notarized, and accepted by the donee. For real property, it requires witnesses and registration with the Register of Deeds (RD) to transfer title.
BIR Form: Use BIR Form No. 1800 (Donor's Tax Return).
Supporting Documents:
- Certified true copy of the Deed of Donation.
- Taxpayer Identification Numbers (TIN) of donor and donee.
- Proof of FMV (e.g., zonal value certification, assessor’s certificate, appraisal report, construction contracts/receipts).
- Title documents (e.g., Transfer Certificate of Title).
- If applicable, Certificate Authorizing Registration (CAR) from BIR.

Process

Execute and notarize the Deed of Donation.
File BIR Form 1800 with the Revenue District Office (RDO) where the donor resides, within 30 days from the donation date (date of notarization or execution, whichever is earlier).
Pay the tax via authorized agent banks, BIR collection officers, or electronic means (e.g., eFPS for large taxpayers).
Obtain CAR from BIR, which is required for RD registration.
Register the deed with the RD and pay transfer fees (e.g., 1% of FMV registration fee).
The donee must report the donation in their income tax return if it affects their tax liability (though generally exempt).

Failure to file/pay on time incurs penalties: 25% surcharge (50% if willful neglect), 12% annual interest, and fines up to P50,000. Criminal liability may apply for evasion.

Other Considerations

Related Taxes:
- Documentary Stamp Tax (DST): 1.5% on the FMV or consideration (whichever higher), payable by the donor.
- Local Transfer Tax: Imposed by local government units (up to 0.75% in cities/provinces).
- Capital Gains Tax: Not applicable to pure donations, but if reclassified as a sale, 6% applies.
- Value-Added Tax (VAT): Generally not applicable to donations, unless the donor is in business and the property is inventory.
Donee's Perspective: The donation is not income to the donee (Section 32(B)(3), NIRC), but if sold later, the basis for capital gains is the donor's basis or FMV at donation, whichever lower.
Special Cases:
- If the donee completes the construction, no additional donor's tax unless funded by the donor.
- Donations to spouses or relatives may have family law implications (e.g., conjugal property rules).
- Cross-border donations: If the donor is non-resident, tax applies only to Philippine-situs property.
Audits and Disputes: BIR can audit within 3 years (10 years for fraud). Appeals go to the Court of Tax Appeals.
Planning Tips: To minimize tax, donors can spread gifts over multiple years to utilize the P250,000 exemption annually or donate to exempt entities.

Conclusion

Donating a lot with ongoing construction in the Philippines involves careful compliance with donor's tax rules to avoid penalties. The 6% flat rate simplifies computation, but accurate valuation of the land and improvements is essential. By preparing a proper Deed of Donation, valuing the property correctly, and filing/paying on time, donors can ensure a smooth transfer. This tax serves as a mechanism to promote equitable wealth distribution while allowing generous acts. For personalized guidance, engaging a lawyer or accountant familiar with Philippine tax law is recommended.

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